Seib & Wessel: What We’re Reading Monday

Tax Professor Pushes Plan to Tax Consumption

Michael Graetz is a “be prepared” kind of guy.

A professor of tax law at Columbia University who did a stint in the George H. W. Bush Treasury, Mr. Graetz believes that someday Congress and a future president will realize that piece-by-piece changes to the individual and corporate income tax system won’t work. At that point, he predicts, the U.S. will follow every other developed economy and adopt a tax on consumption.

And when Congress and the president get to that point, Mr. Graetz is ready with a revenue-neutral tax reform plan that combines a value-added tax with an income tax that would hit only the best-off.

At a meeting of the National Tax Association last week– where Mr. Graetz was awarded the Daniel M. Holland Medal for outstanding contributions to the study and practice of public finance – he offered an updated version of a plan he detailed in a 2008 book.

He would impose a new national value-added tax and use the money, in part, to eliminate the income tax – and the filing of income tax returns – for families with incomes under $100,000. For others, there would be three marginal tax brackets (14%, 27% and, for income above $600,000, 31%.) He’d also lower the corporate tax rate to 15%, cut the payroll tax and give cash to low-income families with children. For more, see the full tax plan.

“It does not tear up the tax code and start over,” Mr. Graetz says. “It simply returns the nation to its pre-World War II tax system, where most revenue came from taxing consumption — then in an archaic way, through tariffs — and the income tax was limited to its proper function of providing tax justice through progressivity for folks at the very top. My proposal is designed to promote more economic growth without shifting the tax burden away from the top to families with less income.”

Number crunchers at the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution think tanks, say the current version of the Graetz plan would raise as much money as today’s tax code without shifting the tax burden among income groups.

Mr. Graetz doubts that’ll work. “I don’t think that Congress can get to a corporate rate low enough to solve the international tax problems we now face,” he says. “There’s a gap between those like Dave Camp, who seem to want only to tax income earned in the U.S by U.S. multinational corporations, and Max Baucus and Senate Democrats, who seem to want to tax income earned anywhere in the world by a U.S. company. That gap is simply too large to bridge without a new revenue source to get the corporate rate down to a level where that doesn’t matter much, if at all.”

“Moreover, it is impossible to do corporate tax reform without dealing with noncorporate businesses–a problem for which there is no credible solution now on the table,” he adds. (A large fraction of business income now goes to partnerships and other entities that are taxed through the individual tax code.)

–David Wessel

Recommended reading from around the Web:

Michael Hirsh (@michaelphirsh) says the preliminary nuclear deal with Iran represents a move by the Obama administration to declare “partial independence” from the foreign policies of Israel and Saudi Arabia and could, if it flowers into a genuine rapprochement between Washington and Tehran, open the door to resolution of long-festering conflicts in Iraq, Syria and Lebanon. [The Atlantic]

AFP/Getty Images

Supporters of Iranian Foreign Minister Mohammad Javad Zarif (portrait) flashing the sign for victory after world powers reached an agreement with Iran over its nuclear program.

Stephen Kotkin looks at whether Iranian leader Hasan Rouhani could be another genuine reformer in the mold of former Soviet leader Mikhail Gorbachev and finds some similarities, including the fact that Iran has so many problems it has little to lose from trying a new course. [Foreign Affairs]

Aaron David Miller (@aarondmiller2) says the Iran deal is less worrisome than the Israelis argue and not as compelling as U.S. officials describe it. “Using it to our advantage depends on keeping sanctions tight, monitoring intrusive and a credible military option on the table,” he says. The U.S. also needs to figure out exactly what to do six months from now if no comprehensive deal materializes. [Politico]

Jonathan S. Tobin (@TobinCommentary) says the only possible reaction to the Iran deal must be dismay. In exchange for measures that only slightly delay Iran’s nuclear progress, the U.S. has begun the process of lifting sanctions and, it has, in effect, normalized a rogue regime. [Commentary]

By declaring a new Air Defense Identification Zone in the East China Sea that appears to overlap directly with similar zones overseen by Japan and South Korea, China has taken a step that “appears targeted precisely at stoking tension between China and Japan, and putting pressure on the U.S.-Japan alliance,” writes Andrew Erickson (@andrewserickson). [WSJ]

Almost everything that has gone wrong with the Obama presidency was set in motion in the first term, Elizabeth Drew (@ElizabethDrewOH) argues. President Barack Obama surrounded himself with his campaign staff, or others he knew well, rather than finding people experienced in governing, she says. [NY Review]

Nancy Cook (@nancook) profiles Dan Tarrullo, the Obama appointee to the Federal Reserve governor who oversees bank regulation, and calls him the “last rabble-rouser” on financial reform left in the Obama administration and financial regulatory apparatus. [National Journal]

The decline in US manufacturing jobs stems less from international competition and trade and more from productivity growth and demand for products that isn’t responsive to higher incomes and lower prices, economists Robert Z. Lawrence and Lawrence Edwards argue. [PIIE]

What We’re Writing

Allies Fear a U.S. Pullback in Mideast:America’s allies in Israel and Saudi Arabia worry that the negotiations with Iran represent just the latest evidence that a war-weary U.S. is slowly seeking to close the books on a series of nettlesome long-term problems, allowing Washington to pull back from its longtime commitment to the Middle East. Read Jerry’s Seib’s latest Capital Journal column.

Our Videos

Obama Makes Pitch to Business: President Obama made a rare visit to the WSJ’s CEO Council in Washington, to respond to criticism over the health-law rollout and renew his push for immigration reform. WSJ reporters assess what obstacles the president still faces:

Sign of the Times

Minor milestones we’ve spotted:

In the U.S. today, 822,000 are working in motor-vehicle and vehicle-parts manufacturing vs. 624,000 in June 2009 when General Motors Co. filed for bankruptcy. [WSJ]

The Dow Jones Industrial Average, which closed Friday at 16064.77, needs another 155 points to reach a new inflation-adjusted high. [WSJ]

The number of new U.S. high school graduates peaked in 2011 after 17 years of growth and is not projected to reach a new high until 2024. [Washington Post]

In the South, 19- to 29-year-olds have credit scores that average 25 points below the national average. [WSJ]

Vancouver is banning door knobs in new construction: Levers and other handles have been deemed better for the aging population. [The Atlantic]

“The Hunger Games: Catching Fire” took in of $161.1 million on its opening day in the U.S. and Canada, not much more than opening day for the first “Hunger Games” ($152.5 million in March 2012). But overseas sales ($146.6 million in 63 markets) more than doubled in several major markets. [WSJ]

Italians in their 30s made 3% more than the national average in 1984. Today’s 30-somethings earn 12% less than the national average. [Internazionale]

Whites make up 9% of South Africa’s 52 million people but fewer than 2% of murder victims. [The Economist]

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